The Guts and Glory of Day Trading. Mark Ingebretsen
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First published in United States of America in 2001 by Prima Publishing
Reprinted in Great Britain 2010
This eBook edition 2011.
Copyright © Harriman House Ltd
The right of Mark Ingebretsen to be identified as the author has been asserted
in accordance with the Copyright, Design and Patents Act 1988.
ISBN: 978-0-85719-148-0
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To Deanna and Erik
Foreword
When the market for tech stocks started tanking last spring, I knew it was just a matter of time before the mainstream press would gleefully proclaim the death of day trading.
Day trading has become a dirty word among many financial journalists, who see its practitioners as not only harming themselves and their families but also the markets. Day traders, they believe, roil the markets in ways that make it un-stable for the majority of investors.
So, did it happen? Did day trading die? As I write this, the market is in a decided slump, yet I don’t for a minute believe that people are losing their interest in the market or in trading and investing online. To find out, I started digging out some statistics, I came up with some conflicting, or at least inconclusive, numbers. U.S. Bancorp Piper Jaffray estimates that more than 2 million online trading accounts were added in the second quarter of 2000, a gain of 12.8 percent. The firm estimates that there are some 11.7 million on-line investors/traders today. Assets held in online brokerage accounts total more than $1 trillion.
At E*Trade, the average number of trades executed each day during the calendar third quarter fell 11 percent from the second quarter and was way down from its peak. But trades at E*Trade are still up 84 percent from last year’s level. The flow of new cash into customer accounts at E*Trade was up 37 percent during the summer quarter, while 337,000 new accounts were opened, down just 1 percent from 1999. But average daily trading volume was down over the same period by about 23 percent.
It’s hard to know whether traders are affected more by a down market than the average online investor. At Tradescape, a brokerage with direct-access technology that caters to active traders, the average customer traded more than 547 times in the last quarter, according to U.S. Bancorp Piper Jaffray. But another study by Jupiter Media Metrix shows that the number of visits to online trading sites declined nearly 20 percent in the past six months. On the other hand, interest in the overall category of business and finance sites remains strong: Traffic at these sites is up 11 percent. Judging from the way I see the “trader” and “investor” casually thrown around in the media, however, it’s tough to know how accurate these numbers are. Dozens of sites qualify as both investing and trading sites in our estimation, offering information for both the long-term and the short-term market player.
What is a day trader? A widely varied breed. Some trade Monday through Friday from an office, perhaps scalping a few cents off dozens or hundreds of trades in a day, ending up flat at the closing bell. An industry trade group, the Electronic Traders Association, estimates there are only around 5,000 of these “pure” day traders. Others trade at home, using a couple of monitors, a fast Net connection, and direct-access software. They’re likely to be studying charts and using screening software after hours to plot the next day’s strategy. It’s estimated there are around 240,000 of these hyperactive traders. Other trades fall into the momentum camp, buying and holding positions for a few days or weeks instead of hours. Some, such as Bob Martin, profiled here, research and trade part-time, keeping their day jobs.
What is a day trader? Maybe it doesn’t matter. Day trader, active trader, online investor – all are harnessing the power of the Internet to take control of their finances. This book would have been unheard of just a few years ago. Though a small number of non-professionals toiled in day trading firms’ offices, it was the growth of the Internet, and the tools the Net provides, that made a lot more people realize they could take a crack at trading. There’s never been a more exciting time to be in the market. From top-flight screening software to real-time quotes to direct-access brokers and access to real-time news, individuals really can be on an even playing field with professionals. The Securities and Exchange Commission is encouraging the revolution in its way. The SEC’s Regulation Fair Disclosure, which went into effect last year, mandates that companies make announcements about operations to all investors via the Internet or other means, not just to a few select analysts.
Is day trading dangerous? That depends on what you compare it to. Last year I heard Harvey Houtkin, the outspoken chairman of All-Tech, a day-trading firm, speaking at a trading expo in Oakland, California. Houtkin, who has been a sharp critic of regulation of the day-trading industry, pounded the podium, wondering why the government doesn’t discourage individuals from starting up restaurants. After all, he pointed out, the failure rate for restaurants is quite high. Critics of online trading like to tout the fact that most people who day trade end up losing money. But who are we to say they shouldn’t try? Most day-trading firms and direct-access brokers have some sort of qualifications to open an account, requiring as much as $10,000 on deposit, and many also require a training course. Online sources for learning about trading are increasing, and getting better all the time. You can watch experienced traders draw charts at Web sites such as Intelligent Speculator.com and HardRightEdge.com, and you can learn at sites such as TradingMarkets.com.
Whether Wall Street status quo seekers like it or not, on-line trading is here to stay. And who better to profile some of the most interesting players than Mark Ingebretsen. Mark has written for the magazine I edit, Online Investor, since the first issue hit newsstands in the summer of 1998. From the beginning, Mark has understood the issues surrounding online investing and trading like few other journalists. For Online Investor and TheStreet.com, where he writes a weekly column, Mark has tackled some of the most complicated topics – from options to electronic communications networks to shorting to after-hours trading to how to trade Internet stocks to neural networks. In the course of his reporting, he has interviewed dozens of professional and amateur traders, academics, and online investors.
I admit certain bias. Because I am a financial journalist, and not a trader of financial pro who just happens to edit a magazine, I believe that journalists tend to write the best books and magazine articles about trading. Such is the case with Mark.
Whatever he’s writing about, Mark keeps in mind first and